By Michael Lewis

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Long derided as car-centric relics in need of major overhauls, the aging strip malls that dot North America’s suburbs have faced abandonment and redevelopment pressures for years as big box retailers, fulfilment warehouses and residential projects took precedence.
But with an absence of new supply amid increasingly scarce land and as remote work encourages local shopping, strip malls, typically a row of ground-level shops facing an outdoor sidewalk, a large parking lot and the street, are getting a measure of revenge.

The properties have found a new lease on life, morphing from ‘ugly duckling’ to ‘golden goose’ as the preferred retail asset class for institutional and private investors.

They’re outshining enclosed malls, where occupancy costs are comparatively steep and where vacancy rates have increased, with the departure of big footprint tenants including Sears Canada, Nordstrom and potentially, the Bay.

They are also a top pick among retail REIT (Real Estate Investment Trust) unit holders, with unenclosed plaza trust returns outpacing other retail categories.

Fred Blondeau, head of Canadian research at Green Street, says the real estate data firm favours strip malls along with industrial assets due to supply constraints and high occupancy, although valuations may also reflect what RioCan Real Estate founder Ed Sonshine has called “superb redevelopment potential.”
In the U.S., according to a September blog post from James Corl, head of private real estate investment at American asset manager Cohen & Steers, outdoor malls are the only major property type seeing sustained rental rate growth, with valuations rising, especially on those anchored by groceries or drug stores.

“We believe that a durable acceleration in earnings growth combined with relatively high current yields will propel shopping centre investment performance for some time,” Mr. Corl writes.

In this climate, and as costs derail some condominium building plans, large investors have taken note: Blackstone announced in November that it would spend US$4-billion to acquire Retail Opportunity Investments Corp., which owns about 90 open-air shopping centres, largely on the U.S. west coast.

In Canada, unenclosed strip mall occupancy is expected to remain at 97 to 98 per cent, “if not more,” Mr. Blondeau says, but the shallower rent pool compared with the U.S. could hinder landlords’ ability to push rents higher.

He also called consumer spending a key risk should the Canadian economy struggle amid the threat of U.S. tariffs. Strip malls, however, are less exposed to negative consumer sentiment than other retail, he says, due to their focus on non-discretionary products, so-called necessity goods such as groceries and medicines.

From the point of view of investors, he says strip malls in Canada boast steady cash flow from their mostly domestic tenants along with improving cap rates and strong leasing spreads – the change in rent for a new lease.

“Unenclosed retail has certainly moved up the ladder in terms of what investors want,” agrees Robert Levine, a Vancouver-based principal with real estate services firm Avison Young.

“The product type is a pretty hot commodity right now,” with factors such as the role of neighbourhood plazas as distribution depots for goods bought online bolstering potential investment returns.

In B.C., Mr. Levine says financing has been available for two major strip mall transactions already this year that commanded a total selling price of nearly $200-million for sites anchored by a Canadian Tire and Safeway, respectively.

He says a current listing for the fully leased Riverside Heights Shopping Centre in Surrey is unusual in that its 6.9 acres makes it a candidate for a hybrid investment that adds residences on top of the existing retail footprint.